Supply chain Management at Wal-Mart - Group 3 PDF

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SUPPLY CHAIN MANAGEMENT AT WAL-MART1

Professor P. Fraser Johnson wrote this case solely to provide material for class discussion. The author does not intend to illustrate either effective or ineffective handling of a managerial situation. The author may have disguised certain names and other identifying information to protect confidentiality. Ivey Management Services prohibits any form of reproduction, storage or transmittal without its written permission. Reproduction of this material is not covered under authorization by any reproduction rights organization. To order copies or request permission to reproduce materials, contact Ivey Publishing, Ivey Management Services, c/o Richard Ivey School of Business, The University of Western Ontario, London, Ontario, Canada, N6A 3K7; phone (519) 661-3208; fax (519) 661-3882; e-mail [email protected]. Copyright © 2006, Ivey Management Services

Version: 2008-06-03

INTRODUCTION

With US$312.4 billion in 2006 sales from operations spanning 15 countries, Wal-Mart Stores, Inc. (WalMart) was the world’s largest retailer. Wal-Mart’s supply chain, a key enabler of its growth from its beginnings in rural Arkansas, was long considered by many to be a major source of competitive advantage for the company. In fact, when Wal-Mart was voted “Retailer of the Decade” in 1989, its distribution costs were estimated at 1.7 per cent of its cost of sales, comparing favorably with competitors such as Kmart (3.5 2 per cent of total sales) and Sears (five per cent of total sales). But by 2006, competitors were catching up. Many of Wal-Mart’s management techniques, which it borrowed and refined after having seen them in action at innovative retailers, were now being copied by others. By 2006, most retailers were using bar codes, shared sales data with suppliers, had in-house trucking fleets to enable self distribution, and possessed computerized point-of-sale systems that collected item-level data, in real-time. Although Wal-Mart continually searched for cost saving initiatives, in the most recent quarters the company had been unable to meet its self-imposed target of holding inventory growth to half the level of sales growth. Wal-Mart’s new executive vice-president of logistics, Johnnie C. Dobbs, wondered what he could do to ensure that Wal-Mart’s supply chain remained a key competitive advantage for his firm.

RETAIL INDUSTRY

U.S. retail sales, excluding motor vehicles and parts dealers, reached US$2.8 trillion in 2005. Major categories in the U.S. retail industry included the following:3 1

.This case has been written on the basis of published sources only. Consequently, the interpretation and perspectives presented in this case are not necessarily those of Wal-Mart or any of its employees. 2 Discount Store News, “Low distribution costs buttress chain’s profits”, 18 December 1989. 3 www.census.gov, accessed 23 August 2006.

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Category

2005 (US$ billions)

General merchandise stores

525.7

Food and beverage

519.3

Food services and drinking places

396.6

Gasoline

388.3

Building materials and gardening equipment and supplies

327.0

Furniture, home furnishings, electronics and appliances

211.7

Health and personal care

208.4

Clothing and clothing accessories

201.7

Sporting goods, hobby, book, music

81.9

In the United States, retailers competed at local, regional and national levels, with some of the major chains such as Wal-Mart and Costco counting operations in foreign countries as well. In addition to the traditional one-store owner-operated retailer, the industry included formats such as discount stores, department stores (selling a large percentage of soft goods, i.e., clothing), variety and convenience stores, specialty stores, supermarkets, supercentres (combination discount and supermarket stores), Internet retailers and catalogue retailers. Major retailers competed for employees and store locations, as well as for customers. The 10 biggest global retailers were as follows: Retailer

2006 Sales (US$ billions)

Headquarters

Wal-Mart Stores, Inc.

312.4

U.S.

Carrefour SA

88.2

France

The Home Depot, Inc.

81.5

U.S.

Metro AG

66.0

Germany

Tesco

63.7

U.K.

The Kroger Co.

60.6

U.S.

Costco

53.0

U.S.

Target Corp.

52.6

U.S.

Royal Ahold

52.2

Netherlands

Aldi Group

37.0 (est.)

Germany

Source: Company reports, www.hoovers.com

The top 200 retailers accounted for approximately 30 per cent of worldwide retail sales.4 For 2005, retail sales were estimated to be US$3.7 trillion5 in the United States and CDN$572 billion in Canada.6

4 5 6

http://www.uneptie.org/pc/sustain/reports/Retail/Nov4Mtg2002/Retail_Stats.pdf, accessed 10 May 2006. http://www.census.gov/mrts/www/data/pdf/annpub06.pdf, accessed 10 May 2006. http://www.cardonline.ca/tools/cma_retail.cfm, accessed 10 May 2006.

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BACKGROUND OF WAL-MART STORES, INC.7

Based in Bentonville, Arkansas and founded by the legendary Sam Walton, Wal-Mart was the world’s largest retailer with more than 6,500 stores worldwide, including stores in all 50 states as well as international stores in Argentina, Brazil, Canada, Costa Rica, El Salvador, Guatemala, Honduras, Mexico, Nicaragua, Puerto Rico and the United Kingdom, as well as joint venture agreements in China and a stake in a leading Japanese retail chain. The company had 1.3 million employees (known as “associates”) in the United States and a total of 1.8 million worldwide. It was estimated that Wal-Mart served more than 138 million customers each week. Exhibit 1 presents a summary of Wal-Mart historical financial statements. Wal-Mart’s strategy was to provide a broad assortment of quality merchandise and services at “everyday low prices” (EDLP) and was best known for its discount stores, which offered merchandise such as apparel, small appliances, housewares, electronics and hardware, but also ran combined discount and grocery stores (Wal-Mart Super Centers), membership-only warehouse stores (Sam’s Club), and smaller grocery stores (Neighborhood Markets). In the general merchandise area, Wal-Mart’s competitors included Sears and Target, with specialty retailers including Gap and Limited. Department store competitors included Dillard, Federated and J.C. Penney. Grocery store competitors included Kroger, Albertsons and Safeway. The major membership-only warehouse competitor was Costco Wholesale.

THE DEVELOPMENT OF WAL-MART’S SUPPLY CHAIN

Before he started Wal-Mart Stores in 1962, Sam Walton owned a successful chain of stores under the Ben Franklin Stores banner, a franchisor of variety stores in the United States. Although he was under contract to purchase most of his merchandise requirements from Ben Franklin Stores, Walton was able to selectively purchase merchandise in bulk from new suppliers and then transport these goods to his stores directly. When Walton realized that a new trend, discount retailing — based on driving high volumes of product through low-cost retail outlets — was sweeping the nation, he decided to open up large, warehouse-style stores in order to compete. To stock his new warehouse-style stores, initially named “WalMart Discount City,” Walton needed to step up his merchandise procurement efforts. As none of the suppliers were willing to send their trucks to his stores, which were located in rural Arkansas, selfdistribution was necessary. As Wal-Mart grew in the 1960s to 1980s, it benefited from improved road infrastructure and the inability of its competitors to react to changes in legislation, such as the removal of “resale price maintenance,” which had prevented retailers from discounting merchandise. Purchasing

As his purchasing efforts increased in scale, Walton and his senior management team would make trips to buying offices in New York City, cutting out the middleman (wholesalers and distributors). Wal-Mart’s U.S. buyers, located in Bentonville, worked with suppliers to ensure that the correct mix of staples and new items were ordered. Over time, many of Wal-Mart’s largest suppliers had offices in Bentonville, staffed by analysts and managers supporting Wal-Mart’s business.

7

The information contained in the background and history section is similar to that found in “Wal-Mart Stores, Inc.”, 9B06M068.

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In addition, Wal-Mart started sourcing products globally, opening the first of these offices in China in the mid-1980s. Wal-Mart’s international purchasing offices worked directly with local factories to source WalMart’s private label merchandise. Private label sales at Wal-Mart, first developed in the 1980s, were believed to account for 20 per cent of 2005 sales. Private label products appealed to customers since they were often priced at a significant discount to brand name merchandise; for Wal-Mart, the private label items generated higher margins than did the suppliers’ branded products. Every quarter, buyers met in Bentonville to review new merchandise, exchange buying notes and tips and review a fully–merchandised prototype store, located within a warehouse. In order to gather field intelligence, buyers toured stores two or three days a week, working on the sales floors to help associates stock and sell merchandise. Wal-Mart wielded enormous power over its suppliers. For example, observers noted that increased bargaining clout was a contributing factor in Procter & Gamble’s (P&G) acquisition of chief rival Gillette.8 Prior to the acquisition, sales to Wal-Mart accounted for 17 per cent of P&G’s revenues and 13 per cent of Gillette’s revenues.9 On the other hand, these two suppliers combined accounted for about eight per cent of Wal-Mart’s sales.10 Some viewed Wal-Mart’s close co-operation with suppliers in a negative light: Wal-Mart dictates that its suppliers … accept payment entirely on Wal-Mart’s terms … share information all the way back to the purchasing of raw materials. Wal-Mart controls with whom its suppliers speak, how and where they can sell their goods and even encourages them to support Wal-Mart in its political fights. Wal-Mart all but dictates to suppliers where to manufacture their products, as well as how to design those products and 11 what materials and ingredients to use in those products. When negotiating with its suppliers, Wal-Mart insisted on a single invoice price and did not pay for cooperative advertising, discounting or distribution. Globally, Wal-Mart was thought to have around 90,000 suppliers, of whom 200 — such as Nestle, P&G, Unilever and Kraft — were key global suppliers. With Wal-Mart’s expectations on sales data analysis, category management responsibilities and external research specific to their Wal-Mart business, it was not uncommon for a supplier to have several dozen employees working full-time to support the Wal-Mart business.

Distribution

Wal-Mart’s store openings were driven directly by its distribution strategy. Because its first distribution centre in the early 1970s was a significant investment for the firm, Walton insisted on saturating the area within a day’s driving distance of the distribution centres in order to gain economies of scale. Over the years, competitors copied this “hub-and-spoke” design of high volume distribution centres serving a cluster of stores. This distribution-led store expansion strategy persisted for the next two decades as Wal-Mart added thousands of U.S. stores, expanding across the nation from its headquarters in Arkansas.

8

http://www.newyorker.com/talk/content/?050214ta_talk_surowiecki, accessed 7 Feb 2005. Larry Dignan, “Procter & Gamble, Gillette Merger Could Challenge Wal-Mart RFID Adoption,” Extremetech.com, accessed 31 January 2005. 10 Mark Roberti, “P&G-Gillette Merger Could Benefit RFID,” RFID Journal, 4 February 2005. 11 Barry C. Lynn, “Breaking the chain,” Harper’s Magazine, July 2006, page 34. 9

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Stores were located in low-rent, suburban areas, close to major highways. In contrast, key competitor Kmart’s stores were thinly spread throughout the United States and were located in prime, urban areas. By the time the rest of the retail industry started to take notice of Wal-Mart in the 1980s, it had built up the most efficient logistics network of any retailer. Wal-Mart’s 75,000-person logistics division and its information systems division included the largest private truck fleet employee base of any firm — 7,800 drivers, who delivered the majority of merchandise sold at stores. Wal-Mart’s 114 U.S. distribution centres, located throughout the United States, were a mix of general merchandise, food and soft goods (clothing) distribution centres, processing over five billion cases a year through its entire network. Product was picked up at the suppliers’ warehouse by Wal-Mart’s in-house trucking division and was then shipped to Wal-Mart’s distribution centres. Shipments were generally cross-docked, or directly transferred, from inbound to outbound trailers without extra storage. To ensure that cases moved efficiently through the distribution centres, Wal-Mart worked with suppliers to standardize case sizes and labeling. The average distance from distribution centre to stores was approximately 130 miles. Each of these distribution centres was profiled in a store-friendly way, with similar products stacked together. Merchandise purchased directly from factories in offshore locations such as China or India was processed at coastal distribution centres before shipment to U.S. stores. On the way back from stores, Wal-Mart’s trucks generated “back-haul” revenue by transporting unsold merchandise on trucks that would be otherwise empty. Wal-Mart’s backhaul revenues — its private fleet operated as a for-hire carrier when it was not busy transporting merchandise from distribution centres to 12 stores — were more than US$1 billion per year. Because its trucking employees were non-unionized and in-house, Wal-Mart was able to implement and improve upon standard delivery procedures, co-ordinating and deploying the entire fleet as necessary. Uniform operating standards ensured that miscommunication between traffic co-ordinators, truckers and store level employees was minimized. Retail Strategy

Wal-Mart’s first stores were filled with merchandise that had been bought by Walton in bulk, as he was convinced that a new trend — discounting merchandise off the suggested retail price — was here to stay. In the 1960s, Wal-Mart grew rapidly as customers were attracted by its assortment of low-priced products. Over time, the company copied the merchandise assortment strategies of other retailers, mostly through observation as a result of store visits. Unlike its competitors in the 1970s and 1980s, Wal-Mart implemented an “everyday low prices” (EDLP) policy, which meant that products were displayed at a steady price and not discounted on a regular basis. In a “high-low” discounting environment, discounts would be rotated from product to product, necessitating huge inventory stockpiles in anticipation of a discount. In an EDLP environment, demand was smoothed out to reduce the “bullwhip effect.” Because of its EDLP policy, Wal-Mart did not need to advertise as frequently as did its competitors and was able to channel the savings back into price reductions. To generate additional volume, Wal-Mart buyers worked with suppliers on price rollback campaigns. Price rollbacks, each lasting about 90 days, were funded by suppliers, with the goal of increasing product sales 12

http://www.dcvelocity.com/articles/july2004/inbound.cfm, accessed 19 Aug 2006.

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between 200 and 500 per cent. A researcher remarked: “Consumers certainly love Wal-Mart’s low prices, which are an average of eight per cent to 27 per cent lower than the competition.”13 The company also ensured that its store-level operations were at least as efficient as its logistics operations. The stores were simply furnished and constructed using standard materials. Efforts were made to continually reduce operating costs. For example, light and temperature settings for all U.S. stores were controlled centrally from Bentonville. As Wal-Mart distribution centres had close to real-time information on each store’s in-stock levels, the merchandise could be pushed to stores automatically. In addition, store-level information systems allowed manufacturers to be notified as soon as an item was purchased. In anticipation of changes in demand for some items, associates had the authority to manually input orders or override impending deliveries. In contrast, most of Wal-Mart’s retail competitors did not confer merchandising responsibility to entry-level employees as merchandising templates were sent to stores through head office and were expected to be followed precisely. To ensure that employees were kept up-to-date, management shared detailed information about day/week/month store sales with all employees during daily 10-minute-long “standing” meetings. The display of merchandise was suggested by a storewide template, with a unique template for each store, indicating the layout of Wal-Mart’s various departments. This template was created by Wal-Mart’s merchandising department, after analysing historical store sales and community traits. Associates were free to alter the merchandising template to fit their local store requirements. Shelf space in Wal-Mart’s different departments — from shoes to household appliances to automotive supplies — was divided up, each spot allocated to specific SKUs. Each Wal-Mart store aimed to be the “store of the community,” tailoring its product mix to appeal to the distinct tastes of that community. Thus, two Wal-Mart Stores a short distance apart could potentially stock different merchandise. In contrast, most other retailers made purchasing decisions at the district or regional level. In order to harness the knowledge of its suppliers, key category suppliers, called “category captains,” were introduced in the late 1980s,.and they provided input on shelf space allocation. As an observer noted: One obvious result [of using category captains] is that a producer like Colgate-Palmolive will end up working intensively with firms it formerly competed with, such as Crest manufacturer P&G, to find the mix of products that will allow Wal-Mart to earn the most it can from its shelf space. If Wal-Mart discovers that a supplier promotes its own products at the expense of Wal-Mart’s revenue, the retailer may name a new captain in its stead.14 Information Systems

Walton had always been interested in gathering and analysing information about his company operations. As early as 1966, when Walton had 20 stores, he attended an IBM school in upstate New York with the intent of hiring the smartest person in the class to come to Bentonville to computerize his operations.15 13

William Beaver, “Battling Wal-Mart: How Communities Can Respond,” Business and Society Review, New York: Summer 2005. Vol. 110, Issue 2; pg. 159. 14 Barry C. Lynn, “Breaking the chain,” Harper’s Magazine, July 2006, page 33. 15 http://www.time.com/time/time100/builder/profile/walton2.html, accessed 23 August 2006.

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Even with a growing network of stores in the 1960s and 1970s, Walton was able to personally visit and keep track of operations in each one, ...